The more often you sell and restock your inventory, the more profit you generate. Wade Cook’s inventory was his taxi’s empty back seat; he turned that inventory every time he dropped off a customer and picked up a new customer. And as he suggested, the more often his turned his inventory each day, the bigger his profit became.

Let’s take a step back to define some key terms. Inventory is the products that you have in your store and can sell at any given time. Inventory can be valued either at the price you paid for the goods or at the price you are selling the goods for. It really doesn’t matter how you decide to value your inventory; the important thing is that you value the inventory the same way each time.

In this context, a turn of your inventory occurs when you sell all of your products. For example, if you purchase an inventory of 50 sandals, you complete a full “turn” of the inventory when you have sold those 50 sandals. If you’ve priced your sandals well, you will make a profit on each pair of sandals you sell. And if you sell all 50 sandals, your profit will be equal to 50 times the markup on each pair of sandals. So the more often you turn your inventory, the more profit you can make.

Pricing your products well, regularly counting inventory, and recording inventory transactions lie at the center of your quest to manage your inventory and maximize your profit. Keep accurate records of every product purchase and every sale so that you can track how often you are turning your inventory and how much you make each time you turn it.

A Practical Example

The best way to understand this concept is to see it mathematically. Let’s assume that Pedro, a children’s clothing retailer, buys sandals for 60 pesos each and sells them for 100 pesos each. He has decided to value his inventory of sandals at the selling price. At the beginning of

October, he has 800 pairs of sandals in his inventory. He determines that the inventory’s total value (in terms of how much money he can make if he sells it all) is 80,000 pesos (800 pairs of sandals at the selling price of 100 pesos each). At the end of the month, Pedro adds up all of his sales and finds that he had 80,000 pesos of sales for the month of October. Because his revenues are exactly equal to the value of the inventory he had at the beginning of the month, Pedro knows that he turned his inventory one time in October. By subtracting the costs of the sandals from the revenues from the sandals, Pedro figures that his gross profit for the month was 32,000 pesos (see the following table).

Pedro is an inquisitive business owner, and he wonders how he can make more money in the same amount of time. He does some quick math and discovers that if he were to turn his inventory 11⁄2 times each month, he could have gross revenues of 120,000 pesos each month (and a resulting gross profit of 48,000 pesos). And if he were to turn his inventory two times each month, he could have gross revenues of 160,000 pesos each month and a resulting gross profit of 64,000 pesos.